1. Field of the Invention
The invention relates generally to financial services, and in particular, to the investment of retirement plan assets in fund products and the maintenance of account records for retirement plans and their beneficiaries.
2. Background Art
Qualified retirement plans have long offered investment choices that include mutual fund shares bought and redeemed in transactions with the funds at the net asset value (“NAV”) next calculated by the fund after the purchase or sale order is placed. At the end of 2005, the Investment Company Institute reported that the United States mutual fund industry had a record $8.9 trillion in assets under management of which $3.4 trillion was held in retirement accounts, about equally divided between Individual Retirement Accounts (“IRAs”) and employer-sponsored defined contribution plans, such as 401(k), 403(b) and 457 plans (“Retirement Plans”).
In 1993, The American Stock Exchange (“AMEX”) created the first exchange-traded fund (“ETF”) in the United States. This fund, called SPDRs (pronounced “spiders”, trading symbol “SPY”) or Standard & Poor's Depositary Receipts, offers investors ownership in a unit investment trust holding the stocks in the Standard & Poor's 500 Stock Price Index. Today, investors own over $400 billion worth of shares in more than 350 ETFs, most of them organized as management investment companies with legal structures and governance mechanisms patterned after mutual funds. The portfolios of currently available ETFs are based on indexes. The Securities and Exchange Commission (“SEC”) has not yet allowed ETFs to be “actively managed,” but the availability of actively managed ETFs is widely anticipated.
Unlike open-end mutual funds and like all publicly traded stocks, ETF shares trade during the day like stocks on a stock exchange, giving investors ownership of a portfolio through a position in a single security, the ability to purchase fund shares on margin and the ability to sell fund shares short. Most employer-sponsored retirement accounts do not buy and sell individual stock positions and margin transactions and short sales are not available to retirement accounts. Consequently, these features of exchange-traded funds do not have immediately obvious value in most retirement accounts. The primary attraction of ETFs to retirement investors comes from another feature of these funds: the ETF share creation and redemption process protects ongoing ETF investors from bearing the cost of other investors' purchases and sales of the ETF's shares. A growing number of investors, investment managers and regulators have come to realize that the in-kind ETF creation and redemption process can protect ongoing exchange-traded fund shareholders from the costs imposed on mutual fund shareholders by market timers and even by ordinary buyers and sellers of mutual fund shares who cause the mutual fund to incur transaction costs to accommodate their purchases and sales. In addition, the exchange-traded fund structure can eliminate the inherent conflict between the interests of taxable shareholders who do not want to pay taxes on capital gains and tax-exempt investors who simply want the highest possible returns without any concern for taxes. Most mutual funds have both taxable and retirement account (tax-exempt) shareholders, making this conflict between shareholder objectives a widespread problem. Another advantage of ETFs over mutual funds is that, other things equal, expenses will be lower in an exchange-traded fund. Most exchange-traded funds do not have 12(b)(1) fees or service fees comparable to those embedded in most no-load mutual funds and they do not carry the sales loads characteristic of load mutual funds. Furthermore, they do not have shareholder accounting at the fund level and do have a few other less important characteristics that generally lead to lower expenses.
In spite of their shareholder protection, tax neutrality and expense advantages, exchange-traded funds have not yet become popular investment choices for retirement plans. While investors in retirement plans have embraced ETFs in many other accounts, a satisfactory process for integrating ETFs into retirement accounts at a cost competitive with mutual funds has not been available.